Texas man raised over $4.5M in Bitcoin Ponzi scheme, feds allege

Bitcoin Savings and Trust promised a 7 percent return—then shut down in August 2012.

If you don’t follow the often-shady world of Bitcoin, you may not be familiar with Bitcoin Savings and Trust (BTCST), a virtual bitcoin-based hedge fund that many suspected of being a scam. BTCST shut down in August 2012, and on Wednesday the Securities and Exchange Commission (SEC) formally charged its founder, Trendon Shavers, with running a Ponzi scheme.

In a statement, the SEC said Shavers “raised at least 700,000 Bitcoin in BTCST investments, which amounted to more than $4.5 million based on the average price of Bitcoin in 2011 and 2012 when the investments were offered and sold.”

The government's financial regulator alleges that Shavers violated a number of federal financial regulations. In court documents, the SEC wrote:

Shavers falsely promised investors up to 7 percent interest weekly based on BTCST’s purported BTC market arbitrage activity, including selling BTC to individuals who wished to buy BTC “off the radar,” quickly, or in large quantities.

In reality, the BTCST offering was a sham and a Ponzi scheme whereby Shavers used new BTCST investors’ BTC to pay the promised returns on outstanding BTCST investments and misappropriated BTCST investors’ [bitcoins] for his personal use.

The Dallas Morning News said that it managed to reach Shavers, who declined to comment.

“Fraudsters are not beyond the reach of the SEC just because they use Bitcoin or another virtual currency to mislead investors and violate the federal securities laws,” said Andrew M. Calamari, director of the SEC’s New York regional office, in the same SEC statement. “Shavers preyed on investors in an online forum by claiming his investments carried no risk and huge profits for them while his true intentions were rooted in nothing more than personal greed.”

This presents a big problem for the SEC, if they win this case they're admitting Bitcoins are a currency. If Bitcoins are a currency and not just an internet-based game it makes a lot of things people want to do with them (say, gamble) illegal. Also it should be noted that Bitcoins, despite assertions otherwise, are quite traceable using the block chain.

I don't think anyone in the Bitcoin community thought BTCST was anything but a scam. Most people contributed to see what would happen and a few poorly informed people lost money they didn't intend to.

I'm very interested in seeing how this works out. I think I made the right choice to cash out of Bitcoin when it hit $200 a coin.

This presents a big problem for the SEC, if they win this case they're admitting Bitcoins are a currency.

Umm...no it doesn't. A share of AAPL isn't currency either, but the SEC regulates Apple Inc. because it sold said share as an investment. This was an investment, a fraudulent one, which is why it's the SEC filing charges.

This presents a big problem for the SEC, if they win this case they're admitting Bitcoins are a currency. If Bitcoins are a currency and not just an internet-based game it makes a lot of things people want to do with them (say, gamble) illegal. Also it should be noted that Bitcoins, despite assertions otherwise, are quite traceable using the block chain.

You don't need to admit that bitcoins are currency to bust people for illegal activity, otherwise you could operate your own illegal casino under the excuse that people are betting tokens, not money. In practice, you'd get shut down in the blink of an eye and the government wouldn't have to acknowledge your tokens as legal currency.

What's interesting to me is that the value of BTC is so volatile, that even if a 7% return was promised IN BITCOINS, you could very well get that 7% increase in total bitcoin but at the same time end up poorer than when you started. Say you buy in at $10 with 1 BTC, the next day you have 1.07 BTC but shit now it's only worth $5

This presents a big problem for the SEC, if they win this case they're admitting Bitcoins are a currency.

Umm...no it doesn't. A share of AAPL isn't currency either, but the SEC regulates Apple Inc. because it is sold said share as an investment. This was an investment, a fraudulent one, which is why it's the SEC filing charges.

Agreed.

It isn't a problem for the SEC, it is a problem for the people hoping to keep BTC from being regulated as a "currency".

They're trying, but their problems are twofold:1) Wall Streeters are much, much better at covering their asses than this guy.2) From 1980 onwards, successive congresses and presidential administrations have legalized a lot of the crap Wall St. has gotten away with. You can't prosecute someone for breaking a law that doesn't exist any more. I can assure you, if I could, I'd totally turn in some enemies for violating Prohibition.

7% per year is a great return, 7% per week is so obviously a scam it is amazing people fell for it.

These are bitcoin investors we are talking about. Anything is possible if you believe hard enough.

Also, as is typical with these schemes a lot of people think that they're early enough and they'll be able to get out before it goes bad. They don't prosecute the investors, only the guy running the scheme. Of course the vast majority of those "investors" will be left holding the bag in the end. It's a lot like gambling. High risk, but potentially high reward if you're really lucky.

How high can the bitcoin value go before it crashes back down? Even if it is a truly legitimate investment, basic economics tells us that any economy where currency is freely printed without a strict control on the total amount in circulation will eventually collapse. The Republic of Weimar comes to mind as a historical example of how things can go horribly wrong.

Um... strict control on the total amount is a feature built in to Bitcoin.

How high can the bitcoin value go before it crashes back down? Even if it is a truly legitimate investment, basic economics tells us that any economy where currency is freely printed without a strict control on the total amount in circulation will eventually collapse. The Republic of Weimar comes to mind as a historical example of how things can go horribly wrong.

Um... strict control on the total amount is a feature built in to Bitcoin.

And how is this strict control implemented? Is there an upper limit on the amount of BTC in circulation? What will happen when it is reached?

How high can the bitcoin value go before it crashes back down? Even if it is a truly legitimate investment, basic economics tells us that any economy where currency is freely printed without a strict control on the total amount in circulation will eventually collapse. The Republic of Weimar comes to mind as a historical example of how things can go horribly wrong.

Um... strict control on the total amount is a feature built in to Bitcoin.

And how is this strict control implemented? Is there an upper limit on the amount of BTC in circulation? What will happen when it is reached?

There is a strict upper limit on the number of bitcoins that can ever exist. Also, "mining" is made progressively harder over time by artificially increasing the requirements for discovering a coin. So there will never be a flood of full bitcoins in the market, and by design they should increase in value over time assuming everything else stays the same. If you were an early adopter and mined a ton of coins back when it was "easy", then you can just sit on them until they appreciate for free. Even better, sitting on coins and not using them causes them to become more rare and appreciate even quicker.

The downside is that in the grand scheme of things there just isn't that much money in the system, so it's really hard to cash out without crashing the market.

How high can the bitcoin value go before it crashes back down? Even if it is a truly legitimate investment, basic economics tells us that any economy where currency is freely printed without a strict control on the total amount in circulation will eventually collapse. The Republic of Weimar comes to mind as a historical example of how things can go horribly wrong.

Um... strict control on the total amount is a feature built in to Bitcoin.

And how is this strict control implemented? Is there an upper limit on the amount of BTC in circulation? What will happen when it is reached?

There is a limited number of total bitcoins, but bitcoins can be divided into very small fractions. When the total amount of bitcoins are in circulation, the Value of a bitcoin will continue to change based on what it is worth to people.

How high can the bitcoin value go before it crashes back down? Even if it is a truly legitimate investment, basic economics tells us that any economy where currency is freely printed without a strict control on the total amount in circulation will eventually collapse. The Republic of Weimar comes to mind as a historical example of how things can go horribly wrong.

Um... strict control on the total amount is a feature built in to Bitcoin.

And how is this strict control implemented? Is there an upper limit on the amount of BTC in circulation? What will happen when it is reached?

Yes. That's one of the greatest problems with Bitcoin. It's ultimately deflationary because it has an upper limit of 21 million. Economies suffer just as much if not enough is printed.

How high can the bitcoin value go before it crashes back down? Even if it is a truly legitimate investment, basic economics tells us that any economy where currency is freely printed without a strict control on the total amount in circulation will eventually collapse. The Republic of Weimar comes to mind as a historical example of how things can go horribly wrong.

Um... strict control on the total amount is a feature built in to Bitcoin.

And how is this strict control implemented? Is there an upper limit on the amount of BTC in circulation? What will happen when it is reached?

There is a limited number of total bitcoins, but bitcoins can be divided into very small fractions. When the total amount of bitcoins are in circulation, the Value of a bitcoin will continue to change based on what it is worth to people.

Now here's the interesting part - will it keep being the shiny everyone wants when you can't mine anymore and you can only buy them?

How high can the bitcoin value go before it crashes back down? Even if it is a truly legitimate investment, basic economics tells us that any economy where currency is freely printed without a strict control on the total amount in circulation will eventually collapse. The Republic of Weimar comes to mind as a historical example of how things can go horribly wrong.

Um... strict control on the total amount is a feature built in to Bitcoin.

And how is this strict control implemented? Is there an upper limit on the amount of BTC in circulation? What will happen when it is reached?

New Bitcoins are issued at a controlled rate. Every new Bitcoin "block" issues a given number of bitcoins. Currently, that number is 25, but the number is cut in half approximately every 4 years, until it hits zero, sometime in the 2130s, after a total of 21 million bitcoins have been issued.

Now here's the interesting part - will it keep being the shiny everyone wants when you can't mine anymore and you can only buy them?

There are two incentives to mine: the first is to get the block reward (new bitcoins) for the blocks you find. The second is to collect transaction fees: every bitcoin transaction can have an optional fee attached to it, which goes to the miner who successfully adds it to the blockchain (the blockchain is the global register of all transactions.)

Once the block reward goes away, it is hoped transaction fees will encourage miners to keep at it.

Now here's the interesting part - will it keep being the shiny everyone wants when you can't mine anymore and you can only buy them?

There are two incentives to mine: the first is to get the block reward (new bitcoins) for the blocks you find. The second is to collect transaction fees: every bitcoin transaction can have an optional fee attached to it, which goes to the miner who successfully adds it to the blockchain (the blockchain is the global register of all transactions.)

That was exactly my point. What will be the incentive to buy already mined coins when there are no more available coins to mine? At that point the "gold rush" feeling will be gone and we'll be left with standard economic market rules.

The way I see it, Bitcoin has managed to carve a niche out for itself as a transactional currency. Basically, decentralized PayPal. Normally something like that would never work because how can you trust random strangers on the internet with your money? Bitcoin avoids this by making everybody who owns a coin part of the central authority, and even decentralizes the currency production with the mining model. They promise "free money*" to anybody who mines the coins, and keep any single party from owning a controlling share of the economy.

It's not hard to see why it keeps hanging on. Miners have the promise of free money. Other people get to buy drugs or guns using untraceable funds. Everybody wins.

It should also be pointed out that while there is a hard upper limit on the number of coins produced, there is also inherent deflation built into the fact that coins can be (and have been) lost forever. Hard drive crashes, loss of interest, hacks, and other problems will decrease the number of available bitcoins that will ever be available.

And how is this strict control implemented? Is there an upper limit on the amount of BTC in circulation? What will happen when it is reached?

The upper limit is 21 million BTC. The way it is implemented is every 210,000 blocks (about 4 years) the reward for discovering a new block is halved. It was originally 50 BTC/block, but late last year it halved to 25. The sum of the seried (50 + 25 + 12.5 + ....) is 100, which times 210,000 yields 21 million total. A block is merely a set of bitcoin transactions with a special hash value that validates the contents *plus* all previous blocks. The first transaction in every block is the special coin generation one, which creates new coins sent to the account of the block discoverer.

What prevents anyone from arbitrarily increasing the limit is the block reward is part of the test for a valid block, which every bitcoin client software does. If a block is invalid, it is not propagated by the network. You would have to convince a majority of the users of bitcoin to use software with different rules to change the limit.

What happens when the limit is reached is nothing. The incentive for discovering new blocks (which is what "miners" do) is the reward of new bitcoins *plus* transaction fees on transactions in the block. Transaction fees are expected to take over from new coin creation as the main reward, so mining will continue, and future transactions will continue to be validated.

And how is this strict control implemented? Is there an upper limit on the amount of BTC in circulation? What will happen when it is reached?

The upper limit is 21 million BTC. The way it is implemented is every 210,000 blocks (about 4 years) the reward for discovering a new block is halved. It was originally 50 BTC/block, but late last year it halved to 25. The sum of the seried (50 + 25 + 12.5 + ....) is 100, which times 210,000 yields 21 million total. A block is merely a set of bitcoin transactions with a special hash value that validates the contents *plus* all previous blocks. The first transaction in every block is the special coin generation one, which creates new coins sent to the account of the block discoverer.

What prevents anyone from arbitrarily increasing the limit is the block reward is part of the test for a valid block, which every bitcoin client software does. If a block is invalid, it is not propagated by the network. You would have to convince a majority of the users of bitcoin to use software with different rules to change the limit.

What happens when the limit is reached is nothing. The incentive for discovering new blocks (which is what "miners" do) is the reward of new bitcoins *plus* transaction fees on transactions in the block. Transaction fees are expected to take over from new coin creation as the main reward, so mining will continue, and future transactions will continue to be validated.

So at what point does the valor of a newly discovered block get halved below the cost of all the electricity needed to run the hardware used to get there?